CHICAGO--(BUSINESS WIRE)--The uncertainties following the aftermath of Samarco Mineracao S.A.'s (Samarco, long-term foreign currency Issuer Default Rating: 'BBB'/Rating Watch Negative) tailings dam accident and subsequent developments could lead to significant variance in the company's future rating level, including its bonds, according to Fitch Ratings. A pivotal factor in how quickly Samarco has its license reinstated depends on the findings of the geological investigation taking place regarding the cause of the dam accidents. Fitch expects a smoother and less politicized process for Samarco should the cause be due to natural causes, such as seismic activity, with a more complicated path to recovery if the company is found to be at fault.
Samarco's ratings were placed on Rating Watch Negative following the accident at two of the company's three tailings dams in the state of Minas Gerais, Brazil. The company is currently not mining as its license to operate in Minas Gerais was suspended. Fitch expects to take rating action to resolve the Negative Watch within the next three to six months.
Key areas of concern that Fitch is closely monitoring and their potential impact on ratings are listed below. These scenarios are solely Fitch's various expectations for possible outcomes.
--The length of time to reinstate Samarco's operating licences and restart operations:
The reinstatement of Samarco's licences to operate in the state of Minas Gerais is essential for the company to restart its mining operations. The longer it takes for the licenses to be reinstated, the more likely multiple-notch downgrades of its IDR and unsecured notes will occur absent financial support from Vale S.A. (Vale, LT FC IDR: 'BBB+'/Negative Outlook) and BHP Billiton Ltd (BHPB, LT IDR 'A+'/Negative Outlook), Samarco's joint owners.
--Samarco's ability to produce without the tailings dams if the licenses are reinstated:
The process to rebuild a tailings dam typically takes 12 to 18 months. Samarco has historically disposed of its tailings at its depleted open-pit Germano mine while it conducted maintenance on its tailing dams. The Germano mine is estimated to be capable of storing around two years of tailings, which potentially could allow the company to operate while the dams are being repaired. Potential downgrades would likely be limited to around one or two notches if the company was able to use the Germano mine as a storage site for tailings during reconstruction of the tailings dams.
--Minas Gerais state allows only limited production by Samarco at a lower capacity:
The larger tailings dam at the Germano-Alegria complex that was unaffected by the accident does not have the capacity to take on the additional tailings from the two dams that have been affected by the accident. The company also has a waste-pile that was unaffected. If there are licensing issues regarding the use of the Germano mine to place the tailings indefinitely, Samarco's licenses to operate could be reinstated allowing it to produce at a production capacity determined by the unaffected, operational third tailings dam and waste-pile. Fitch estimates that Samarco could produce at anywhere between 50%-70% capacity under this scenario. For modelling purposes, Fitch also includes its own estimates for various fines, costs and penalties arising from the disaster, and an insurance pay-out being received by the company in 2016. Under the 30% less production scenario, net debt-to-EBITDA would be in the range of 3.5x-4.0x, and in the 50% of production scenario, this ratio would be around 6.0x-6.5x. These scenarios would likely lead to downgrades in the range of two to four notches. The scope of support from the company's shareholders could mitigate these potential downgrade levels.
--Samarco's options if the licences are suspended for a long time or indefinitely:
Excluding the two tailings dams affected by the accident, all of Samarco's other operational assets are unaffected. This includes the company's Alegria-Germano mine complex, the unaffected Germano tailings dam, waste-pile, three slurry pipelines, beneficiation plant, pumping station, port, and four pellet plants, among others. Hypothetically, Samarco could negotiate an agreement to purchase third-party iron ore from Vale that could be transported by ship from Vale's Vitoria port to Samarco's Ubu port, both in the state of Espirito Santo, allowing it to produce iron ore pellets while under the licence ban in Minas Gerais. This would likely be at higher cost, thus eroding Samarco's profit margins, and likely resulting in a multi-notch downgrade.
--Possible punitive damages that can be levied on Samarco:
Potential fines are difficult to project. The level of negligence, if any, will be a key determinant. Previous precedents in Brazil for environmental disasters involving oil companies with severe environmental damage during the last few years have resulted in settlements of around USD100 million-$150 million, on average. The unfortunate loss of life as a result of the flood will require recompense, the village will have to be rebuilt, and the clean-up cost over a large area will result in a significant amount being spent to address these items. Legal cases against the company are highly likely. The ultimate cost of these charges and costs relative to the amounts received from insurance and/or parent companies will determine the extent of the rating action taken by Fitch.
--Fitch's base case:
Samarco is a standalone legal entity and is responsible for the entirety of the cost resulting from the dam accident. Nevertheless, Fitch builds into its base case an expectation that a form of financial support will be forthcoming, if necessary, in the short- to medium-term from either Vale or BHPB, or both, due to Samarco's high-quality assets, niche high-margin products and long historical track record of paying significant dividends to its shareholders. Reputational risk is considered by Fitch to be very high for Vale due to its position as Brazil's largest mining company, as well as its shareholder composition, which includes some of Brazil's largest pension funds.
Additional information is available on www.fitchratings.com
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